SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JULY 31, 1996 COMMISSION FILE NO. 0-13804
THE CHICAGO DOCK AND CANAL TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 36-2476640
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
455 EAST ILLINOIS STREET, SUITE 565
-----------------------------------
CHICAGO, ILLINOIS 60611
----------------- -----
(Address of principal executive offices) (zip code)
(312) 467-1870
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON SHARES OF BENEFICIAL INTEREST - NO PAR VALUE PER SHARE, 5,783,800 SHARES
OUTSTANDING ON SEPTEMBER 13, 1996.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
JULY 31, APRIL 30,
1996 1996
----------- -----------
(IN THOUSANDS)
INVESTMENT IN REAL ESTATE, at cost:
DEVELOPED PROPERTIES $70,158 $70,246
LAND AND LAND IMPROVEMENTS
HELD FOR DEVELOPMENT 16,546 16,961
LAND SUBJECT TO GROUND
LEASES 7,201 6,743
LESS:ACCUMULATED
DEPRECIATION AND AMORTIZATION (14,789) (14,104)
----------- -----------
NET INVESTMENT IN REAL ESTATE 79,116 79,846
----------- -----------
OTHER ASSETS:
CASH AND CASH EQUIVALENTS 520 757
----------- -----------
INVESTMENTS AVAILABLE FOR SALE, AT COST
(APPROXIMATE MARKET VALUE OF $7,320
AT JULY 31, 1996) 7,303 5,973
----------- -----------
SHORT TERM INVESTMENTS-RESTRICTED,
AT COST (AND AT APPROXIMATE MARKET
VALUE) 502 203
----------- -----------
SECURITY DEPOSIT CASH 823 808
----------- -----------
RECEIVABLES:
TENANTS (INCLUDING $29,771 OF ACCRUED
BUT UNBILLED RENTS AT JULY 31, 1996) 29,907 29,647
REAL ESTATE TAXES PAYABLE BY LESSEES 7,273 5,931
LAND IMPROVEMENTS 1,388 1,388
INTEREST 52 45
OTHER 372 225
----------- -----------
38,992 37,236
----------- -----------
OTHER ASSETS, NET 1,045 1,185
----------- -----------
$128,301 $126,008
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
JULY 31, APRIL 30,
1996 1996
----------- -----------
(IN THOUSANDS)
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
REAL ESTATE TAXES $5,475 $4,946
REAL ESTATE TAXES PAYABLE BY LESSEES 7,273 5,931
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 750 750
OTHER 1,770 2,208
CASH DIVIDENDS PAYABLE 347 231
MORTGAGE NOTES PAYABLE 28,087 28,068
----------- -----------
TOTAL LIABILITIES 43,702 42,134
----------- -----------
SHAREHOLDERS' EQUITY:
COMMON SHARES OF BENEFICIAL INTEREST:
NO PAR VALUE, 20,000,000 AUTHORIZED,
5,944,200 ISSUED 3,101 3,101
----------- -----------
PREFERRED SHARES OF BENEFICIAL INTEREST:
NO PAR VALUE, 1,000,000 AUTHORIZED,
NONE ISSUED 0 0
----------- -----------
UNDISTRIBUTED INCOME BEFORE NET GAIN FROM
SALE OF REAL ESTATE PROPERTIES 9,745 9,020
UNDISTRIBUTED NET GAIN FROM SALE
OF REAL ESTATE PROPERTIES 72,372 72,372
----------- -----------
TOTAL UNDISTRIBUTED NET INCOME 82,117 81,392
----------- -----------
LESS:
TREASURY SHARES OF BENEFICIAL INTEREST,
AT COST-160,400 SHARES (619) (619)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 84,599 83,874
----------- -----------
$128,301 $126,008
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 31, JULY 31,
1996 1995
------------ ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REVENUES:
REVENUE FROM RENTAL PROPERTY $4,609 $3,508
REAL ESTATE TAXES PAYABLE BY LESSEES 1,430 1,841
------------ ------------
TOTAL REVENUES 6,039 5,349
------------ ------------
EXPENSES:
REAL ESTATE TAXES 715 729
REAL ESTATE TAXES PAYABLE BY LESSEES 1,430 1,841
PROPERTY OPERATING EXPENSES 827 706
GENERAL AND ADMINISTRATIVE 443 462
DEPRECIATION AND AMORTIZATION 741 750
INTEREST EXPENSE 725 715
------------ ------------
TOTAL EXPENSES 4,881 5,203
------------ ------------
OPERATING INCOME 1,158 146
INVESTMENT AND OTHER INCOME 104 86
EQUITY IN NET LOSS OF LCD PARTNERSHIP (101) (103)
RESTRUCTURING EXPENSES (89) 0
------------ ------------
NET INCOME $1,072 $129
============ ============
EARNINGS PER SHARE $0.19 $0.02
============ ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 31, JULY 31,
1996 1995
----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $1,072 $129
ADD (DEDUCT)-ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 741 750
EFFECT OF AVERAGING HOTEL RENTAL REVENUE (687) (1,037)
EQUITY IN NET LOSS OF LCD PARTNERSHIP 101 103
CHANGES IN RECEIVABLES (1,084) (1,869)
CHANGES IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,433 2,615
DIFFERENCE BETWEEN CURRENT INTEREST PAYABLE AND CONTRACTUAL INTEREST 43 519
AMORTIZATION OF LOAN FEES 20 20
OTHER 90 39
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 1,729 1,269
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
NET (ACQUISITION) DISPOSITION OF SHORT-TERM INVESTMENTS (1,330) (694)
NET (ACQUISITION) DISPOSITION OF SHORT-TERM INVESTMENTS-RESTRICTED (299) (299)
ADDITIONS TO INVESTMENTS IN REAL ESTATE (56) (85)
LEASE COMMISSIONS AND OTHER (26) (22)
----------- -----------
CASH FLOWS (USED IN) INVESTING ACTIVITIES (1,711) (1,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
CASH DIVIDENDS DECLARED (347) (58)
CHANGE IN DIVIDENDS PAYABLE 116 0
PRINCIPAL PAYMENTS ON LOANS (24) (22)
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES (255) (80)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (237) 89
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 757 344
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $520 $433
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
THE CHICAGO DOCK AND CANAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996 AND 1995
1. Business of the Trust
The Trust is an equity oriented real estate investment trust which owns
partially developed land (including certain developed sites) located in downtown
Chicago, Illinois and income producing real property in Chicago and elsewhere.
The Trust was organized in 1962, succeeding to the business of its corporate
predecessor. The Trust has elected to continue its operation as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. The Trust
is self administered.
As of July 31, 1996, the Trust's principal real estate investments
consisted of: (i) fee title or other interests in approximately 22 acres of
partially developed land in Cityfront Center in downtown Chicago (including
certain developed sites); (ii) Waterplace Park, an office complex in
Indianapolis, Indiana; and (iii) Lincoln Garden, an office complex in Tampa,
Florida.
2. Summary of Significant Accounting Policies
The financial statements have been prepared in conformity with generally
accepted accounting principles and reporting practices. Significant accounting
policies are described below and reference is made to the Notes to Consolidated
Financial Statements in the Trust's Form 10-K filed with the Securities and
Exchange Commission on July 9, 1996.
The financial statements in this report have not been audited by
independent public accountants. In the opinion of management, all adjustments
necessary for the fair presentation of the financial position and the results of
operations for the interim periods have been made. The results for the three
month periods are not necessarily indicative of the results for the full year.
3. Subsidiaries and Joint Venture
CDCT Plaza Corporation:
CDCT Plaza Corporation (the "Plaza Corp.") was formed by the Trust as a
wholly owned subsidiary. The Plaza Corp. owns or controls the 400 stall parking
facility under and adjacent to Ogden Plaza. The Plaza Corp. owns the area under
Park Drive, adjacent to Ogden Plaza, has a lessee's interest pursuant to a long
term lease from the Chicago Park District in the area under Ogden Plaza, and has
a licensee's interest in the area under Columbus Drive, adjacent to Ogden Plaza,
pursuant to a license with the City of Chicago. The license expires February
2002, subject to the City of Chicago's right to cancel the license for the
payment of a fee to
the Plaza Corp. The area subject to the license contains 100 parking stalls and
is separate from the main portion of the parking facility which contains 300
stalls. An independent contractor operates the 400 stall parking facility, with
the Plaza Corp. receiving a varying percentage of gross revenues. The Trust
consolidates the operations of the Plaza Corp. in these financial statements.
CDCT Residence Corporation:
CDCT Residence Corporation (the "Residence Corp.") is a wholly owned
subsidiary which was capitalized with land located at the southeast corner of
East North Water and New Streets, (the "High-Rise" site) in Cityfront Center.
The Trust consolidates the operations of the Residence Corp. in these financial
statements.
In August 1989, the Residence Corp. entered into a partnership, LCD
Partnership ("LCD"), with Daniel E. Levin ("Levin"). The Residence Corp.
contributed the High-Rise site which was valued at $6,602,000 and which had an
historic cost of $1,689,000. Levin contributed cash, building plans for the
High-Rise building and a note for $903,000 which matured and was paid in
September 1991. Levin's contribution was valued at $3,301,000. The Residence
Corp. is a two-thirds partner in LCD and Levin is a one-third partner. Major
decisions of LCD, however, require unanimous approval. Accordingly, the
Residence Corp. accounts for its investment in LCD under the equity method.
In August 1989, LCD entered into a joint venture, New Street Joint Venture
("NSJV"), with Northwestern Mutual Life Insurance Company ("Northwestern
Mutual"). LCD contributed the High-Rise site, the plans and other assets
related to the development of the building (excluding the $903,000 note from
Levin). LCD's capital account was credited with $9,000,000. Northwestern
Mutual contributed an equal amount of cash. Northwestern Mutual and LCD are
50/50 partners in NSJV, subject, however, to Northwestern Mutual's priority over
LCD in certain distributions of cash flow and proceeds from sale or refinancing.
LCD accounts for its investment in NSJV under the equity method. The NSJV
agreement provides for Northwestern Mutual to receive a priority return of
operating cash flow and the proceeds from sale or refinancing of the High-Rise.
Cash flow must increase significantly from its current level for LCD to receive
any cash distribution from NSJV after the payment of Northwestern's preferential
return.
Northwestern Mutual also loaned NSJV $36,700,000 on a non-recourse basis.
In addition, the NSJV Agreement calls for LCD and Northwestern Mutual to
contribute, if necessary, their prorata shares of shortfalls in operating and
capital requirements. The High-Rise building opened in July 1991 and contains
480 units.
As of March 31, 1996, total assets and liabilities of NSJV were $45,731,000
and $38,287,000, respectively. For the three months ended March 31, 1996, NSJV
recorded gross revenues of $1,744,000 and total expenses of $2,094,000, which
resulted in a net loss of $350,000. Included in total expenses is depreciation
and
amortization expense, which for the three months ended March 31, 1996 equaled
$424,000. LCD has a fiscal year which ends on April 30 and NSJV uses the
calendar year. Accordingly, LCD records its proportionate share of NSJV's
operating results four months in arrears.
4. Investments in Real Estate
Land and Land Improvements Held for Development -
Surface Parking:
During the third quarter of fiscal 1996, the Trust leased four surface
parking lots containing 725 stalls to System Parking, Inc. The lots had
previously been leased to North Pier Chicago on a fixed rental basis. The new
lease started January 1, 1996 and provides that the Trust will receive varying
percentages of the gross revenue generated by the lots. System Parking is
responsible for paying the operating expenses of the lots, but the Trust has the
obligation to pay the real estate taxes. The recent renovation of nearby Navy
Pier has increased demand for parking in the area and the Trust expects an
increase in net cash flow under the terms of the new lease compared to the prior
lease. For calendar year 1996, the new lease provides for minimum rent of
$3,600,000 (subject to potential adjustment during the remediation of the Tested
Site) (See Note 7).
Land Subject to Ground Leases -
Sheraton Chicago Hotel & Towers:
During fiscal 1989, the Trust entered into a 50 year ground lease (with
lessee options to extend the term 49 more years) with Tishman Realty Corporation
of Cook County ("Tishman Realty") for approximately 2.3 acres of land in
Cityfront Center in Chicago. Tishman Realty subsequently assigned this lease to
Cityfront Hotel Associates Limited Partnership ("Cityfront Hotel Associates"),
the current lessee. The site is currently improved with a 1,200 room convention
hotel called the Sheraton Chicago Hotel & Towers which opened in March 1992.
The lease provides for minimum annual rental payments which were fixed at
$150,000 through calendar 1994, and for payments which totalled $75,000 for the
six month period January 1, 1995 through June 30, 1995. The payments increased
to $900,000 for the six month period July 1, 1995 through December 31, 1995, and
will equal $2,100,000 for calendar 1996. After 1996, the base rent increases
annually by the increase in the Consumer Price Index, but not less than 5% nor
more than 10% per year. In addition to the base rent, percentage rent became
payable beginning July 1, 1995. Percentage rent equals the amount by which base
rent is exceeded by the product obtained by multiplying gross revenues from
operations by certain applicable percentages ranging from 2% - 5%.
The lessee also acquired an option to purchase the land. The earliest date
on which the land could be acquired pursuant to the option is July 30, 2003.
The purchase option provides that the land price will be the greater of (i) $40
million at January 1, 1999 escalating thereafter by the increase in the Consumer
Price Index,
but not less than 5% nor more than 10% per year or (ii) the highest annual
ground rent payable during the thirty-six month period preceding the closing
date divided by the Applicable Capitalization Rate which ranges from 7.2% -
7.5%. In addition, in the event the option is exercised during the twelfth
operating year beginning April 1, 2003, a supplemental amount of $2.5 million
will be added to the purchase price. If the option were exercised at its
earliest date, April 1, 2003, the minimum purchase price which the Trust would
receive is approximately $52 million.
The Trust recognizes as rental revenue the average minimum base rent
payable over the initial 50 year term of the lease. This rent increases from
$150,000 in 1989 to approximately $16 million in 2038. The average rent
calculation also considers the minimum purchase price pursuant to the terms of
the above described purchase option. Under the Trust's method of revenue
recognition, the total carrying value of the land and the related accrued rent
receivable will never exceed the minimum option purchase price. The annual base
rental income recognized on the lease is approximately $4,848,000. The cash
base rent received during the first quarter of fiscal 1997 equaled $525,000.
The lease obligated the Trust to construct certain Phase II infrastructure
prior to the opening of the hotel. These development obligations consisted
primarily of Ogden Plaza and the elevated roadways adjacent to Columbus Drive
and surrounding the plaza. In addition to the infrastructure obligation under
the terms of the lease, the Trust also constructed the parking facility under
Ogden Plaza. Phase II infrastructure was substantially completed in March 1992.
This infrastructure was financed with the proceeds from a loan which has debt
service payments which, for the first eight years, correspond to the base rent
payable on the ground lease.
5. Mortgage Notes Payable
At July 31, 1996, mortgage notes payable consisted of two notes secured by
first mortgages on the rents from and the land under the Kraft Building, and the
rents from and the land under the Sheraton Chicago Hotel & Towers. Both notes
are non-recourse with respect to the Trust.
The principal balance of the Kraft Building note issued in May 1987, was
$5,696,000 at July 31, 1996. It is due in April 2016, bears interest at an
annual rate of 9.5%, payable monthly, and is self-amortizing over its term. The
carrying value of collateral pledged on this note at July 31, 1996 equaled
$15,000.
At July 31, 1996, the principal balance of the note secured by the rents
from and the land under the Sheraton Chicago Hotel & Towers was $22,391,000.
The note is due January 1, 2005. The initial principal amount of the loan was
$14,367,000 and the interest rate is 10.25%. Amounts are payable monthly, but
through December 31, 1998, the debt service currently payable coincides with the
ground rent due under the Sheraton lease. The difference between current
interest payable and the contractual interest is added to principal. Starting
in 1999, debt
service will be computed on a 30 year amortization based on the then current
principal balance. The carrying value of collateral pledged on this note at
July 31, 1996 was $35,164,000 and consisted of land, the depreciated basis in
land improvements and accrued but unbilled rent.
On December 23, 1994, the Trust entered into a revolving credit agreement
with First Bank, N.A. The agreement has a three year term and provides for a
maximum commitment by the lender of $20,000,000. The agreement is secured by
the Cityfront Place Mid-Rise. Initially the Trust borrowed $4,000,000 of the
available credit and used the proceeds to retire the $4,000,000 Cityfront Place
Mid-Rise note issued February 25, 1992. During the fourth quarter of fiscal
1995, the Trust repaid the $4,000,000 initially advanced under the credit
facility using available cash and cash equivalents and investments available for
sale. Since that time the Trust has not borrowed any of the available credit.
Accordingly, at July 31, 1996, the full amount of the facility is available.
Interest only, based on LIBOR plus 135 basis points, is due monthly on the
amount advanced under the revolving credit agreement. The carrying value of
collateral pledged on this revolving credit agreement at July 31, 1996 equaled
$45,799,000.
6. Short-Term Investments - Restricted
As a requirement of the revolving credit agreement entered into by the
Trust on December 23, 1994 with First Bank, N.A., the Trust agreed to make
monthly payments into an escrow account. This account funds the semi-annual
real estate tax payments due on the Cityfront Place Mid-Rise. At July 31, 1996,
the balance in this account equaled $502,000.
7. Environmental Remediation Costs
In June 1993, the U.S. Environmental Protection Agency (the "EPA")
conducted preliminary surface tests on a 2.8 acre site currently used as a
surface parking lot (the "Tested Site"). The Tested Site was examined because
thorium, a radioactive element, may have been used on the Tested Site earlier in
the century by a former tenant, in a building which was demolished in the mid
1930's after the expiry of the tenant's lease.
In January 1994, the Trust entered into a consent order with the EPA
regarding preliminary testing to be performed on the Tested Site. Initial on-
site tests were conducted pursuant to that order in May 1994 and laboratory
analysis was completed on the samples in June 1994. The results of the tests
indicate one concentrated area which appears to be contaminated by thorium, and
other scattered areas on the Tested Site with significantly lower levels of
contamination. The most contaminated area is within the footprint of the
building previously occupied by the former tenant. The Trust submitted the
results of the testing to the EPA in September 1994.
The Trust's consultants have prepared cost estimates to remediate the
contaminated areas on the Tested Site which range from $1 million to $7 million,
with $3.5 million representing the most likely estimated cost of the required
remediation, which involves excavation and disposal of the areas contaminated by
thorium. That range of costs is estimated based on the results of surface
measurements, the analysis of samples gathered from nine borings taken on the
site and the review of the Unilateral Administrative Order. While the tests
conducted to date were made pursuant to the consent order with the EPA,
additional conditions may exist on the site which would be discovered only upon
excavation.
The Trust entered into an agreement on August 11, 1995 (which was expanded
and superseded by an agreement dated January 18, 1996) with Kerr-McGee Chemical
Corporation ("KMCC"), the successor to a former tenant of the Tested Site,
regarding the financial responsibilities of the parties for the remediation of
the Tested Site (the "Reimbursement Agreement"). Under the terms of the
Reimbursement Agreement, KMCC is responsible for the remediation of the Tested
Site with respect to thorium contamination and any thorium/mixed waste
contamination, and the Trust has the obligation to reimburse KMCC for 25% of the
cost of this remediation, not to exceed a maximum reimbursement obligation of
the Trust of $750,000. Legal counsel has advised the Trust that it may have
claims for coverage for some or all of its share of the remediation costs under
its current or prior insurance policies.
On June 6, 1996, the EPA issued a Unilateral Administrative Order which
requires the remediation of the Tested Site and the disposal of the contaminated
material at an approved off-site facility. In response to this Order, KMCC, in
conjunction with the Trust, submitted a work plan for the remediation to the
EPA. The EPA has since reviewed and commented on the work plan and the Trust
and KMCC are currently preparing their response to the comments. In September,
additional drilling began to more precisely define the area to be remediated.
Remediation is scheduled to begin in October, with completion expected by the
end of calendar year 1996. Additional conditions may exist on the site which
would be discovered only upon excavation which may impact the timing of
remediation.
In the fourth quarter of fiscal 1995, the Trust recorded environmental
remediation expense of $1,035,000 based upon the resolution of accounting and
other issues related to environmental remediation costs of property held for
development and the execution of the Reimbursement Agreement with KMCC. This
amount included the Trust's share of testing and legal costs related to the
Tested Site through April 30, 1995, plus $750,000, which is the maximum
reimbursement obligation of the Trust pursuant to the terms of the Reimbursement
Agreement. This amount excluded the amount of the potential claims for some or
all of the Trust's share of the remediation costs under the Trust's current or
prior insurance policies.
8. Solicitation of Indications of Interest for Business Combination
On February 28, 1996 the Trust retained Lehman Brothers Inc., as its
financial advisor to assist in studying strategic alternatives designed to
enhance shareholder value. As part of this study, the Board, on April 11, 1996,
authorized Lehman Brothers to seek preliminary indications of interest for a
potential business combination involving the Trust. There can be no assurance
that any transaction will occur as a result of this study.
ITEM 2
THE CHICAGO DOCK AND CANAL TRUST AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
On February 28, 1996 the Trust retained Lehman Brothers Inc., as its
financial advisor to assist in studying strategic alternatives designed to
enhance shareholder value. As part of this study, the Board, on April 11, 1996,
authorized Lehman Brothers to seek preliminary indications of interest for a
potential business combination involving the Trust. There can be assurance that
any transaction will occur as a result of this study.
To date, East Water Place, L.P., the developer lessee of East Water Place
Townhomes has leased 28 townhome lots from the Trust. The developer is
obligated to lease 16 more lots during calendar 1997 and the remaining 12 lots
in calendar 1998. Initial occupancy of the townhomes is planned by the end of
calendar 1996.
On June 6, 1996, the EPA issued a Unilateral Administrative Order which
requires the remediation of an area in Cityfront Center currently used as a
parking lot known as the Tested Site. Kerr-McGee Chemical Corporation ("KMCC"),
which is responsible for the remediation of the Tested Site, in conjunction with
the Trust submitted a work plan for the remediation to the EPA. The EPA has
since reviewed and commented on the work plan and the Trust and KMCC are
currently preparing their response to the comments. In September, additional
drilling began to more precisely define the area to be remediated. Remediation
is scheduled to begin in October, with completion expected by the end of
calendar year 1996. Additional conditions may exist on the site which would be
discovered only upon excavation which may impact the timing and the extent of
remediation.
During the third quarter of fiscal 1995, the Trust sold a parcel of land to
the Chicago Music and Dance Theater, Inc. (the "Theater") for the construction
of a 1,500 seat performing arts theater in Cityfront Center. The Theater
reports it is close to raising the necessary financing for the construction of
the project. The Trust retained repurchase rights for the site if the Theater
has not made a substantial commencement of construction prior to September 1,
1996, subject to force majeure delays. The Theater has requested a 30 day
extension of this date in order to finalize its financing arrangements.
Recently the actual calendar 1995 real estate tax bills for the Trust's
Cityfront Center property were released by the Cook County Assessor. These
bills reflect a slight decrease from calendar 1994 taxes. The Trust had
reflected an estimate for calendar 1995 taxes at the end of fiscal 1996 which
assumed an increase in calendar 1995 taxes over calendar 1994 taxes.
During the first quarter of fiscal 1997, the Mid-Rise and High-Rise
buildings of Cityfront Place continued their strong performances. Average
occupancy during the quarter was 97% and 96% for the Mid-Rise and High-Rise
respectively. At the Trust's two properties outside of Chicago, occupancy at
Lincoln Garden in Tampa, Florida and at Waterplace Park in Indianapolis, Indiana
was 92% and 90%, respectively, at July 31, 1996. Furthermore, occupancy at
Lincoln Garden rose to 96% in August 1996 and at Waterplace Park occupancy
increased to 99% in September 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 VERSUS
THREE MONTHS ENDED JULY 31, 1995
Revenues:
Revenue from rental property increased for the three months ended July 31,
1996 compared to the same period in the prior year primarily due to revenue
generated by the Trust's surface parking lots. As a result of a lease, which
began January 1, 1996, with System Parking, Inc., current quarter revenues from
these lots increased by $824,000. Current quarter revenues also exceeded
revenues from the first quarter of fiscal 1996 for the Mid-Rise, the Ogden Plaza
parking facility, Waterplace Park and Lincoln Garden. Finally, the current
quarter reflects revenues generated by the East Water Place Townhomes. No
townhome revenue was recorded during the first quarter of fiscal 1996.
Under the terms of the lease with System Parking, Inc., the Trust became
liable for real estate taxes on all four of the surface parking lots. Under the
prior lease, the lessee had the responsibility for the payment of real estate
taxes. As a result, real estate taxes payable by lessees decreased in the
current quarter. Real estate taxes payable by lessees are also reflected as
an expense, and therefore, do not affect net income.
Equity in Net Loss of LCD Partnership reflects the Trust's effective one-
third share of the operations of New Street Joint Venture, the entity which owns
the Cityfront Place High-Rise. The loss during the Trust's first quarter of
fiscal 1997, which ended July 31, 1996, reflects the building's operations from
January 1, 1996 through March 31, 1996, the first quarter of New Street Joint
Venture's fiscal year. The current quarter loss had no impact on Trust cash
flows since New Street Joint Venture did not require additional equity
contributions and because of the cash flow priority of LCD's partner in New
Street Joint Venture.
Expenses:
Although real estate tax expense decreased by only $14,000 this quarter
compared to the first quarter of fiscal 1996, two major differences exist
between the
quarters. First, actual calendar 1995 real estate tax bills were lower than the
estimate reflected in the April 30, 1996 accrual balance. Second, under the
terms of its lease with System Parking, Inc., the Trust assumed the
responsibility for real estate taxes on all four of the surface parking lots.
Under the terms of the prior lease, the lessee had the responsibility for the
payment of taxes and these were reported as real estate taxes payable by
lessees.
Property operating expenses increased primarily due to increases at the
Mid-Rise and Waterplace Park. The increase at the Mid-Rise included an increase
in carpet replacement in individual units, which is recorded as expense when
incurred. The increase at Waterplace Park is the result of a significant
increase in occupancy from the current quarter as compared to the first quarter
of fiscal 1996.
Restructuring expenses consist primarily of legal and consulting expenses
related to the solicitation of indications of interest for a potential business
combination.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows:
OPERATING
Cash flows from operating activities increased in the first quarter of
fiscal 1997 compared to the same quarter in the prior year due primarily to an
increase in cash flows from parking operations.
INVESTING
Cash flows used in investing activities increased during the current
quarter due to an increase in the acquisition of unrestricted short-term
investments. These acquisitions were made possible by the increase in operating
cash flows.
FINANCING
Cash flows used in financing activities increased during the current
quarter due to the increase in dividends paid.
Funds From Operations:
The Board of Governors of the National Association of Real Estate
Investment Trusts in 1991 adopted a definition of "Funds From Operations" as
follows:
Funds from Operations means net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis.
Funds from Operations equaled $2,031,000 during the current quarter
compared to $1,011,000 for the same period in the prior fiscal year. This
increase of $1,020,000 is primarily due to the increase in net income from
parking operations.
In March 1995, the Board of Governors clarified the preceding definition
with respect to the treatment of certain items, although the clarification did
not affect the Trust's reporting of such funds. The preceding definition of
Funds from Operations includes certain material non-cash items which are
reported in income and expense of the Trust. Please refer to the Consolidated
Statements of Cash Flows in the financial statements for the computation of cash
flows from operating, investing and financing activities.
General Discussion:
The Trust has historically used non-recourse debt secured by individual
properties as the primary source of additional capital, when needed, to fund
acquisitions or development. It has also acquired income producing properties
in tax-deferred exchanges in which little or no debt was required. The Trust
currently has four income producing properties with no debt outstanding -
Waterplace Park, Lincoln Garden, the Cityfront Place Mid-Rise and the Ogden
Plaza parking facility.
During the third quarter of fiscal 1995, the Trust entered into a three
year $20,000,000 revolving credit agreement with First Bank, N.A. secured by the
Mid-Rise apartment building. At July 31, 1996, the full amount of the facility
is available. The Trust agreed to make monthly payments into an escrow account
to fund the semi-annual real estate tax payments due on the Cityfront Place Mid-
Rise. At July 31, 1996 the balance in this account equaled $502,000.
At July 31, 1996, total interest bearing debt of the Trust equaled
$28,087,000, all of which was fixed rate debt.
While the Trust may not, under federal tax law applicable to REIT's, hold
property for sale in the ordinary course of business, its policy is to evaluate
periodically its portfolio to properties which might be considered for sale,
lease or exchange. The most recent sale occurred during the third quarter of
fiscal 1995 when the Trust sold a parcel containing approximately 41,000 square
feet to the Chicago Music and Dance Theater, Inc. Prior to this, the Trust sold
the land under the Brick Venture apartment building adjacent to North Pier at
Cityfront Center in fiscal 1989.
In January 1994, the Trust entered into a consent order with the EPA
regarding preliminary testing to be performed on a 2.8 acre site in Cityfront
Center
currently used as a parking lot (the "Tested Site"). The Trust's consultants
have prepared cost estimates to remediate the contaminated areas on the Tested
Site which range from $1 million to $7 million, with $3.5 million representing
the most likely estimated cost of the required remediation, which involves
excavation and disposal of the areas contaminated by thorium.
The Trust entered into an agreement on August 11, 1995 (which was expanded
and superseded by an agreement dated January 18, 1996) with Kerr-McGee Chemical
Corporation ("KMCC"), regarding the financial responsibilities of the parties
for the remediation of the Tested Site (the "Reimbursement Agreement"). Under
the terms of the Reimbursement Agreement, KMCC is responsible for the
remediation of the Tested Site with respect to thorium contamination and any
thorium/mixed waste contamination, and the Trust has the obligation to reimburse
KMCC for 25% of the cost of this remediation, not to exceed a maximum
reimbursement obligation of the Trust of $750,000.
On June 6, 1996, the EPA issued a Unilateral Administrative Order which
requires the remediation of the Tested Site and the disposal of the contaminated
material at an approved off-site facility. In response to this Order, KMCC, in
conjunction with the Trust, submitted a work plan for the remediation to the
EPA. The EPA has since reviewed and commented on the work plan and the Trust
and KMCC are currently preparing their response to the comments. In September,
additional drilling began to more precisely define the area to be remediated.
Remediation is scheduled to begin in October, with completion expected by the
end of calendar year 1996. Additional conditions may exist on the site which
would be discovered only upon excavation which may impact the timing and the
extent of remediation.
The Trust will consider using its current cash, investments available for
sale or its current credit facility, to fund its obligations under the
Reimbursement Agreement with KMCC. The Trust may have claims for coverage for
some or all of its share of the remediation costs under its current or prior
insurance policies.
In order to fully develop the land owned by the Trust in Chicago,
additional infrastructure expenditures will be required. These improvements are
necessary to fully redevelop the property in accordance with the Planned
Development Ordinance approved by the Chicago City Council on November 6, 1985.
The Trust completed Phase I infrastructure in fiscal 1988 using the
proceeds from borrowings secured by the Kraft Building and One Michigan Avenue.
Total Phase I expenditures amounted to approximately $10 million. The Trust
completed Phase II infrastructure in fiscal 1992 using the proceeds from a
borrowing secured by the rents from and land under the Sheraton Chicago Hotel &
Towers ground lease.
Phase III infrastructure consists primarily of the River Esplanade and
River Drive east of McClurg Court, Du Sable Park (a 3 acre park east of Lake
Shore Drive),
the slip promenade on the south bank of the Ogden Slip and the upgrading of the
remainder of East North Water Street. The total current cost to the Trust for
the improvements is estimated to be approximately $8.5 million, which includes
the Trust's obligation to contribute $600,000 for improvements to be made in Du
Sable Park expected to be completed during calendar 1997. The remainder of
Phase III will be constructed as needed to support additional development in the
area. However, certain improvements are required to be completed no later than
the completion of 2,500 units of residential development on the east portion of
Cityfront Center. The estimated cost of the remaining infrastructure is based
on a number of assumptions, including, but not limited to the following: (i)
East Water Place, L.P. completes all improvements on the parcels which are
currently under development for the East Water Place Townhomes related to the
slip promenade on the south bank of the Ogden Slip; (ii) the Chicago Music and
Dance Theater, Inc. completes the pedestrian concourse through its parcel; (iii)
the estimate is based on design development drawings; actual site conditions may
materially increase the amount; and (iv) the cost estimate includes hard
construction costs only and is stated in terms of current costs. It is the
intention of the Trust to finance future infrastructure with cash on hand, its
current credit facility, general corporate indebtedness, borrowings secured by
its income producing properties and ground leases, asset sales or some
combination of these sources.
The recent renovation of nearby Navy Pier has increased demand for parking
in the surrounding area. As a result, the Trust expects an increase in net cash
flow under the terms of its new lease for four surface parking lots with System
Parking, Inc. compared to the cash flow it received from its prior lease with
North Pier Chicago. In addition, the Trust expects an increase in net cash flow
from the operations of the Ogden Plaza parking facility.
Starting January 1, 1996, the base rent payable to the Trust from its lease
with Cityfront Hotel Associates Limited Partnership for the Sheraton Chicago
Hotel & Towers increased to an annual rate of $2.1 million. While all of the
base rent will be paid as additional debt service on the loan which financed the
infrastructure improvements associated with the hotel, it is the starting point
for the future increases in minimum base rent and minimum rent will exceed the
debt service beginning in 1999. Also starting July 1, 1995, the percentage rent
provisions of the ground lease became effective. During fiscal 1996 the Trust
received $226,000 in percentage rent, of which $96,000 was recognized as revenue
with the remaining $130,000 representing a prepayment of future percentage rent.
Percentage rent for the months of April, May and June 1996, exceeded base rent
by $106,000, less than the overpayment from the prior year. Accordingly, no
additional payments of percentage rent were received during the first quarter of
fiscal 1997.
The New Street Joint Venture Agreement obligates LCD and Northwestern
Mutual to contribute, if necessary, their prorata shares of funds related to the
operation of the High-Rise building. As of July 31, 1996, LCD had funded
$335,000 as its share of additional capital contributions, all of which was
contributed prior to
fiscal 1994. LCD currently holds approximately $910,000 in short term
investments. The Trust's two-thirds share of these short term investments is
not reflected on the Trust's balance sheet and is in addition to the Trust's
cash and investments. The New Street Joint Venture agreement provides for
Northwestern Mutual to receive a priority return of operating cash flow and the
proceeds from sale or refinancing of the High-Rise. Cash flow must increase
significantly from its current level for LCD to receive any cash distributions
from New Street Joint Venture after the payment of Northwestern's preferential
return. The cash hold by LCD is not subject to any such priorities.
On July 17, 1996 the Board of Trustees of the Trust declared an increase to
the Trust's quarterly dividend to $.06 per share from $.04 per share effective
for the dividend paid September 1, 1996. This followed an increase to the
Trust's quarterly dividend to $.04 per share from $.01 per share effective for
the dividend paid March 1, 1996. These dividend increases reflect an overall
improvement in the cash flow and the operating results of the Trust.
Management considers that the Trust's liquidity at July 31, 1996 is
adequate to meet its operating needs and commitments.
Part II
- -------
Item 6(a) - Exhibits -
10.17 Amendment to Employment Agreement between the Trust and Charles
R. Gardner dated August 5, 1996 is filed herewith.
10.18 Noncompetition Agreement between the Trust and Charles R. Gardner
dated August 5, 1996 is filed herewith.
10.19 Amendment to Employment Agreement between the Trust and David R.
Tinkham dated August 5, 1996 is filed herewith.
10.20 Noncompetition Agreement between the Trust and David R. Tinkham
dated August 5, 1996 is filed herewith.
Item 6(b) - No Form 8-K's were filed during the first quarter of fiscal
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHICAGO DOCK AND CANAL TRUST
/s/ DAVID R. TINKHAM
--------------------------------
David R. Tinkham, Vice
President and Chief
Accounting Officer
September 13, 1996